Credit Contagion between Financial Systems

41 Pages Posted: 14 Sep 2011 Last revised: 6 Jan 2012

See all articles by Natalia Podlich

Natalia Podlich

Deutsche Bundesbank

Michael Wedow

European Central Bank (ECB) - Directorate Financial Stability and Supervision

Multiple version iconThere are 2 versions of this paper

Date Written: September 6, 2011

Abstract

We examine contagion from a number of financial systems to the German financial system using the information content of CDS prices in a GARCH model. After controlling for common factors which may cause comovement in security prices, we find evidence for contagion from the US and European financial systems. Our results additionally confirm that the set up of the financial rescue scheme in Germany partially shielded German banks but not insurance companies from contagion. Overall, our results suggest that contagion from dealer banks have the most prominent effect on the German financial system. While dealer banks impact on German banks and insurance companies in a similar way, a deterioration in the CDS spreads of dealer banks has a particularly pronounced effect on German dealer banks.

Keywords: Systemic Risk, CDS Spreads, Contagion, OTC Dealer

JEL Classification: G14, G21, G28

Suggested Citation

Podlich, Natalia and Wedow, Michael, Credit Contagion between Financial Systems (September 6, 2011). Midwest Finance Association 2012 Annual Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1927178 or http://dx.doi.org/10.2139/ssrn.1927178

Natalia Podlich (Contact Author)

Deutsche Bundesbank ( email )

PO Box 10 06 02
D60006 Frankfurt
Germany

Michael Wedow

European Central Bank (ECB) - Directorate Financial Stability and Supervision ( email )

Frankfurt a.M.
Germany

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